Alternative Investments and Credits is planning to move court against the Reserve Bank of India after it has been stripped of its licence to carry out non-banking finance activities.
AICL, which is among the very few Islamic finance entities in the country, will also take up its case with the finance ministry.
A director of the company stated that the board is weighing legal options to obtain a stay on the regulator's decision to cancel the certificate of registration.
Till now there was a widely shared perception that while commercial banks planning to offer Islamic banking products will run into legal hurdles, non-banking finance companies will face no restrictions. That has now changed, with RBI directing AICL to stop financing business almost a decade after it was founded.
Earlier, the central bank had pointed out that AICL was not complying with the fair practices code under which the financier has to lay down the terms and conditions of funding, including the interest charged.
"Basically, the Indian banking and finance system runs on the interest concept and Islamic finance is based on profit-sharing," said an RBI spokesperson on Thursday, a day after the regulator revoked AICL's registration.
As a genre of financial services, Islamic finance abhors the idea of making money out of money and upholds the belief that wealth is generated through actual trade and investment. Across markets, funding structures of Islamic finance institutions have to be compliant with Sharia'h, the sacred law of Islam.
While RBI's directions will have to be complied with by all NBFCs - irrespective of whether or not it's operating as per Sharia'h - the question is what constitutes "interest" for the purpose of RBI guidelines, especially in the present context of RBI's NBFC Fair Practice guidelines.
"In our view, there are no stipulations under the regulations issued by the RBI which prevents a non-deposit accepting NBFC from carrying out interest-free or participative financing," said Suprio Bose of the law firm JurisCorp, which has advised AICL in the past.
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